Extending Payment Terms A Competitive Edge — And A Cash Flow Burden

Extending payment terms to corporate buyers is painful. Not only does it impose a cash flow burden on the supplier, but, in some cases, those 30- or even 60-day payment terms aren’t enough for the customer, resulting in late payments.

Research released last year from Atradius found that 93 percent of suppliers report having dealt with a late-paying customer in the last year across the Americas, with 46 percent of domestic B2B invoices in the U.S. past-due. Considering the financial burden of extending terms to customers, why do suppliers put up with it?

“There are real costs behind the ability to extend credit to your customer. But the reason people do it is it’s a sales tool,” explained Michael Noble, CEO of B2B credit management and accounts receivable solution provider Apruve. He explained that data compiled by Apruve found that corporate customers on account present a 2.2-times greater order frequency versus customers that pay with credit cards, and show 3.3-times more line items per order, too.

“When you get someone on account, it’s a competitive advantage [for the supplier],” said Noble. “It’s harder to go to a competitor if your customer has an account with you. But it’s painful to manage.”

The CEO said Apruve has taken the consumer credit card business model and applied it to B2B payments in an effort to remove this burden from the suppliers’ books. The company uses an API that captures transaction data from a corporate buyer, and its network of banks, to provide suppliers with payments on their invoices 24 hours after their orders ship. Buyers, meanwhile, are able to enjoy extended payment terms.

Noble likened the process to a customer paying for a purchase at Target: The POS terminal captures transaction data like Apruve’s API does, enabling the credit card company to work with a bank and pay Target immediately, while the customer enjoys the extended payment terms on the card.

“We built a similar model designed specifically for the B2B market,” he said.

Designing a solution specific to B2B payments means taking into accounts receivable risks like non-payment. Whereas a supplier would have to ensure due diligence in extending payment terms to corporate clients, Noble explained that Apruve does that for them.

“We view each supplier like a big portfolio of risk,” he explained. “We’re better able to anticipate the risk and payment patterns of suppliers. Loss risk is always part of the equation.”

That risk of non-payment and late payments occurs all across the globe. According to Noble, there is more of a correlation between late B2B payments and industry than there is with the geographic location of a business.

“It depends on the market,” he said. “Contractors are notorious for not being good payers. But when you go over to a company selling microchips, the buyers are more sophisticated and it’s a different type of profile. It really depends on the vertical.”

“Late payment is a reality,” he added, and indeed, research shows that the U.S. has its fair share of late payment issues. With operating with buyer accounts and extending payment terms to customers such an enticing competitive edge, however, suppliers will need to figure out a way to ensure they keep their clients happy and keep cash flow strong.

Noble said suppliers shouldn’t go it alone.

“At a certain point, running your own credit program, especially of a certain size, is just untenable,” he said. “It’s too much of a manual process to handle without automation.”

He pointed to some companies that have thousands of buyers, meaning suppliers are often forced to only offer extended payment terms to the top percentile of those customers. Integrating an automated accounts receivable solution to extend payment terms to all customers, and mitigate risk at the same time, is positive for both sides, the CEO said.

“It gives both buyers and sellers a single platform to communicate,” he said. “That relationship improves as there is more consistency around how invoices are delivered and how payments happens. But it’s really the behind-the-scenes, the financing back to the seller in real-time, that adds a lot of value to suppliers.”